Report No. 213

2. (a) Section 138 Of The Negotiable Instruments Act, 1881

2.1 In India, there is reason to believe that instruments of exchange were in use from early times and we find that papers representing money were introduced into the country by one of the Muhammadan sovereigns of Delhi in the early part o the fourteenth century, the idea having been borrowed from China; a complete system of paper-currency and banking had been developed as early as the tenth century and it is not importable that such an idea filtered into India sometime latter9

2.2 Before the passing of the Act, the law of negotiable instruments as prevalent in England was applied by the courts in India when any question relating to such instruments arose between Europeans.9

2.3 Though the Negotiable Instruments Act had been passed into law in 1881, Chapter XVII comprising sections 138 to 142 was inserted by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988).

2.4 The value of a cheque, which was reduced to merely a piece of paper, particularly amongst the business community, has been greatly enhanced since the introduction of this new Chapter XVII relating to penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts. The implementation of these provisions for nearly 14 years revealed certain shortcomings which have been endeavoured to be plugged by the Negotiable Instruments (Amendment & Miscellaneous Provisions) Act, 2002 (55 of 2002).

The Act 55 of 2002 has, besides other amendments, amended sections 138, 141 and 142 and inserted new sections 143 to 147 in the Act (section 143 - summary trial; section 144 - service of summons; section 145 - evidence on affidavit; section 146 - Bank's slip prima facie evidence; section 147 - offences to be compoundable).

1. Bhashyam & Adiga's The Negotiable Instruments Act, rev. Justice Ranganath Misra, Bharat Law House, New Delhi, 18th edn. (2008), p.1.

2. Presidential address by Hon'ble Mr. Justice K. G. Balakrishnan, CJI , at National Seminar on Delay in Administration of Criminal Justice System, 17.03.2007, Vigyan Bhavan, New Delhi [http://supremecourtofindia.nic.in speeches-2007].

3. The Hindustan Times, New Delhi, 14-10-2008.

4. Speech delivered by Hon'ble Mr. Justice Ajit Prakash Shah, Chief Justice, Delhi High Court, at the inaugural of Dwarka Courts Complex, on the September, 2008.

5. http://www.indianexpress.com, visited 26-09-2008.

6. http://www.deccanherald.com and http://www.aol.in,visited 29-29-2008.

7. KSL & Industries Ltd. v. Mannalal Khadelwal, 2005 Cr LJ 1201 (Bom), 1204.

8. S. Rama Krishna v. S. Rami Reddy AIR 2008 SC 2066.

9. Bhashyam & Adiga's The Negotiable Instruments Act, rev. Justice Ranganath Misra, Bharat Law House, New Delhi, 18th Edn. (2008), p. 5.

2.5 Section 138 reads as under:

'Dishonour of cheque for insufficiency, etc., of funds in the account. - Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both:-

Provided that nothing contained in this section shall apply unless-

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation.- For the purposes of this section, "debt or other liability" means a legally enforceable debt or other liability.'

2.6 To constitute an offence under section 138 of the Negotiable Instruments Act the following ingredients need to be fulfilled:

(i) Cheque should have been issued for the discharge, in whole or part, of any debt or other liability;

(ii) The cheque should have been presented within the period of six months or within the period of its validity, whichever is earlier; Note: The cheque may be presented any number of times for collection within its validity.

(iii) The payee or the holder in due course should have issued a notice in writing to the drawer within thirty (fifteen prior to 2002 amendments) days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;

(iv) After the receipt of the said notice by the payee or the holder in due course, the drawer should have failed to pay the cheque amount within fifteen days of the receipt of the said notice;

Note: Notice of dishonour is unnecessary when the party entitled to notice cannot after due search be found (see section 98(d) of the Act).

(v) On non-payment of the amount due to the dishonoured cheque within fifteen days of the receipt of the notice by the drawer, the complaint should have been filed within one month from the date of expiry of the grace time of fifteen days, before a Metropolitan Magistrate or a Judicial Magistrate of the first class. The cognizance of a complaint may be taken by the Court after the prescribed period, if the complaint satisfies the Court that he had sufficient cause for not making a complaint within such period.

(vi) The offence under this Act is compoundable (see section 147 of the Act, inserted in 2002).1

2.7 Under law, when a person has tendered the amount payable by him he must be deemed to have discharged his obligation and the creditor is bound to accept the tender. Where on dishonour of cheque issued by the accused, he disclaimed the liability to pay the cheque but on receiving notice tendered payment of the whole amount twice in front of the court but the complainant refused to accept it both the times, the accused could not be said to be guilty of non-payment of the amount.1

2.8 The Supreme Court again spelt out necessary ingredients of section 8 in Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd., AIR 2000 SC 954, reiterated by the Apex Court in K. R. Indira v. Dr. G. Adinarayana, AIR 2003 SC 4689. What follows therefrom is that the last ingredient to complete an offence under section 138 of the Act is failure of the accused to make payment within 15 days after service of notice.

If payment is made within the said period, no offence is committed, but in case of failure, the offence gets completed. Even if the payment is made on the 16th day the same is not sufficient to come out of the rigours of section 138 of the Act. In criminal law, commission of offence is one thing and prosecution is quite another. Commission of offence is governed by section 138 of the Act. Prosecution is governed by section 142 of the Act.2

1. Bhashyam & Adiga's The Negotiable Instruments Act, rev. Justice Ranganath Misra, Bharat Law House, New Delhi, 18th Edn. (2008), p. 743.

2. Bhashyam & Adiga's The Negotiable Instruments Act, rev. Justice Ranganath Misra, Bharat Law House, New Delhi, 18th Edn. (2008), p. 744.